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An Iron Curtain For A Metals Company? (Int'l Edition)

February 15, 1998

International -- European Business

AN IRON CURTAIN FOR A METALS COMPANY? (int'l edition)

Trans-World runs into local antipathy over quick profits

David Reuben was livid. Arriving at a shareholders' meeting of the Kazchrome metals company in Kazakhstan last October, the chairman of Britain's Trans-World Metals Ltd. was halted at the door by guards--even though Trans-World holds a 57% stake in Kazchrome. As Reuben stood fuming outside, other shareholders voted in a new management team hostile to Trans-World. That was only the start of Reuben's troubles. Within weeks, managers backed by the government had seized control of all of Trans-World's holdings in Kazakhstan.

For metals traders, the days of easy money in the former Soviet Union are over. After the collapse of communism, traders reaped huge profits by offering cash and raw materials to struggling aluminum smelters and steel mills in exchange for exclusive trading rights. To cement the deals, the traders bought stakes in major metals producers. But now, that cozy arrangement is under attack. Charging that metals traders are draining off profits, minority shareholders are trying to throw them out.

Trans-World is the prime target of this push. One of the first traders to enter the region, it grabbed control of over half of Russia's aluminum output, plus major holdings in steel, chrome, and iron ore both there and in Kazakhstan. Managers welcomed Trans-World at first because it cut them a slice of trading profits while keeping their plants running. But minority shareholders soon grew restless, complaining that it was pocketing all the money and was not investing in badly needed modernization.

In Kazakhstan, the government has begun a criminal investigation of Trans-World for allegedly siphoning off profits from its holdings. "There were dozens of offshore companies set up as a cover for this operation," says Alexander Machkevitch, a local businessman who worked with Trans-World but has defected to the government's camp. The government, the chief minority shareholder, has canceled all of Trans-World's trading contracts.

For its part, Trans-World denies any illegal activity. It says Machkevitch and others orchestrated the takeover of its holdings in Kazakhstan by falsely representing themselves as Trans-World's agents at shareholder meetings.

In Russia, meanwhile, minority shareholders successfully broke Trans-World's grip on the giant Novolipetsk steel mill. Since 1995, mill management had stonewalled minority shareholders who tried to learn how much Trans-World, which owns 37%, was paid under its trading contracts. But last fall, Vladimir Lisin, a top executive whose support for Trans-World had given it effective control, switched sides. Lisin says he split with Trans-World because it owed Novolipetsk more than $200 million. Lisin canceled Trans-World's contract, and shareholders booted several of its representatives off the board.SEIZED CARGO. Clearly, Trans-World won't give up without a fight. It recently won rulings in Western courts upholding its deals with Novolipetsk and the Kazakh companies and has impounded their shipments at Antwerp and Rotterdam port facilities. It also won injunctions against Machkevitch and other managers in Kazakhstan. "We continue to seek to regain control," Reuben says through a spokesperson.

Trans-World has few allies in this battle, however. Analysts say it alienated industry leaders by focusing on quick profits rather than long-term investment. Trans-World counters that it has pumped more than $2.5 billion into the region and rescued Novolipetsk from "virtual bankruptcy" and made it into a "world-class steel plant."

Still, Trans-World's long-term prospects look grim. Only last summer, Reuben and Kazakh President Nursultan A. Nazarbayev broke ground for a smelter in which Trans-World was to invest $200 million. That project is now on hold. No matter how fiercely Trans-World fights, its influence will wane as the industry recovers. Trans-World's mother lode in the former Soviet Union may be tapped out.By Carol Matlack in Moscow, with Julia Flynn in London